Household debt ratio not a cause for concern

China's household debt ratio to GDP does not seem to be too high compared with those of developed nations, said Yang Zhiyong, research fellow at the National Academy of Economic Strategy, Chinese Academy of Social Sciences, in his article Household debt ratio not a cause for concern.

However, the expert said, China's household debt has increased rapidly, adding for many families, the mortgage payment to household income ratio is unreasonable. Once housing loans account for an unreasonably high percentage of a family's disposable income, the family risks defaulting on the debt.

The expert suggested that in particular, China should take effective measures to promote the steady growth of household income and promote the healthy and stable development of the real estate sector.

The full text of the article is as follows:

The author is a research fellow at the National Academy of Economic Strategy, Chinese Academy of Social Sciences. The views don't necessarily represent those of China Daily.

Household debt is closely related to financial risk. The subprime crisis in the United States in 2008 made it almost impossible for many US families with low credit ratings to repay their housing loans, which in turn led to the global financial crisis whose negative impact on the world economy is still evident.

As far as China's household debt level is concerned, experts' opinions vary. Forty-eight percent of the interviewees recently interviewed by Tencent Financial Technology Think Tank said they consider the overall debt level of Chinese families to be comparatively high, while 39 percent of them said it was moderate, and 8 percent said it was relatively low.

China's household debt ratio to GDP does not seem to be too high. Although housing prices in many Chinese cities have stabilized, even declined in some, the high cost of property means the majority of Chinese families take out mortgage loans to purchase housing. By the end of 2017, China's household loan balance was 40.5 trillion yuan (6.02 trillion U.S. dollars), an increase of 21.4 percent year-on-year, which accounted for 49.3 percent of the country's GDP that year.

By any means, it is a relatively low debt level compared with those of developed countries. In 2017, the United States' household debt ratio to GDP was 80 percent, and the United Kingdom's annual household expenditure exceeded the yearly income for the first time in three decades. In Germany and Japan, too, the household debt ratio to GDP exceeded 50 percent.

However, China's household debt has increased rapidly. In 2008, China's household debt ratio to GDP was only 17.9 percent, which means it increased more than 30 percentage points in only one decade, due mainly to housing mortgages.

For many families, the mortgage payment to household income ratio is unreasonable. Once housing loans account for an unreasonably high percentage of a family's disposable income, the family risks defaulting on the debt.

Thanks to the slower economic growth and transformation of the economic development model, some families are already facing financial difficulties. Added to that, the risk of mortgage defaults may affect not only the sustainability of the financial industry, but also many families' livelihoods. In general, housing loans are the top concern for Chinese households, but household debt is more than just mortgage loans. Consumption loans, such as car loans have also developed rapidly in recent years. Some have even taken consumption loans to invest in the stock market or speculate in the real estate sector, creating more risks for household debt. Should the investments or speculation fail, families with stable incomes, could also default on their debt.

Besides, some illegal fundraising has also caused household debt risks.

Given that China's household debt ratio to GDP is relatively low compared with those of developed nations, the country can manage its household debt risk as long as it takes comprehensive prevention and control measures.

In particular, China should first take effective measures to promote the steady growth of household income. Tax cuts and administrative fee reductions targeting small and medium-sized enterprises can significantly help to achieve that goal. SMEs employ relatively a large number of people. So reducing their tax and fee burden will promote employment and prevent families' incomes from declining which is very likely to cause a loan repayment crisis.

Also, policymakers should choose an appropriate macroeconomic policy to create a good business environment. Deleveraging is important, but the authorities should also be aware of the new risks that it may create. That is why it is important to adopt structural deleveraging－in which case a moderately easy monetary policy could guarantee abundant liquidity.

Moreover, we should promote the healthy and stable development of the real estate sector. Promoting healthy development of housing market is crucial, as high housing prices will undermine the potential of economic growth, as well as the competitiveness of enterprises and the entire economy.

The authorities should also take measures to impart financial knowledge to people so households can make informed decisions and prevent financial risks.

And the authorities should have a clear picture when it comes to household statistics work so that they can lay a solid foundation for preventing and controlling household debt risks.